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Asset managers: Too clever by half

Many business leaders and recruiters understand the importance of appraising a person’s emotional quotient (EQ) as well as their intelligence quotient (IQ).

Many business leaders and recruiters understand the importance of appraising a person’s emotional quotient (EQ) as well as their intelligence quotient (IQ). This distinction can also be a useful way of appraising your asset manager. What is more important in today’s turbulent markets: high IQ or EQ?

A study of emotional intelligence will resonate with family offices managing relationships with external advisers. Advisers can be very clever, with high IQs and blue chip educations and careers. They can also be very personable, charming and self-confident. These are strong EQ traits.

Asset managers are paid a lot of money to make the right calls on behalf of their clients. A major part of their value relates to the high IQ techniques they provide, such as rigorous top-down analyses of macro-economic and strategic asset allocation options; bottom-up evaluations of sectors, funds and individual stocks; and the intelligence required to read market sentiment.

However, asset managers sometimes lack an absolutely essential EQ skill; the ability to step into their client’s shoes and relate to the client’s needs and emotional concerns. Not so long ago, one large asset management firm had an intellectually robust internal debate about how to communicate bad investment performance to their clients. They concluded that talking to clients “could open a can of worms”, and it was best to remain silent unless the clients themselves raised the issue. It was a big mistake, giving a competitive advantage to other firms who promised to be more open and active.

Asset managers often respond to these points with, “you are being unfair, we invest heavily in client relationship management”. The problem is that family office surveys support the anecdotal evidence that there are real issues with how asset managers work with clients and product providers, and handle good and bad news.

So what are the character traits that asset managers need to change, to improve their EQ?

One trait to change is over-mystifying the business. The financial services industry as a whole tends to use complex terminology and phrases. In some cases, quite straight-forward business practices are made to look like rocket science, to the extent that practitioners give the impression they are intellectually superior.

In other cases, especially in derivatives markets, the full complexity (and potential risks) of the products being sold are not widely understood, even by the people selling the products to clients. The same is true for some derivatives business managers and external regulators. Rather than acting in a mature way and admitting “I don’t understand this product”, too many senior directors have kept quiet. Unfortunately the market itself, now worth multiples of the total value of underlying securities, has become a danger not just to investors but to global economies.

Too much talking and not enough listening is another trait to change. Asset managers like to talk. After all, they are the experts, helping to manage billions of dollars of client assets. However, some managers react badly when their statements are challenged. It is not unusual to hear trustees and beneficial owners complain about overly defensive responses to simple questions during performance reviews. People with high EQs don’t behave or react like this.

A third low-EQ character trait to avoid is being over-positive. This is often ingrained in the culture of professional services firms, where senior executives stress the advantages of “being positive”. Some advisers carry it off with aplomb, even when the news is bad; ending reports, presentations and meetings on a positive note. The best advisers provide an honest and balanced view to good news messages.

Other advisers are relentlessly positive to the point of being naïve. “Financial crises, recessions, Japan falling off a cliff, social unrest across the Middle East, wars? It’s over sold. Concerns about currencies and defaults? They are just conspiracy theories.” This approach is not helpful in the current political, economic, social and investment environment. It’s not best advice for clients, and clients are increasingly adept at spotting advisers who paper over the cracks.

At the end of the day, the onus lies with family offices to help asset managers’ step into their family office’s shoes. If it is important for the family office to have a more EQ type discussion with their asset managers then the office should say so. Of course there should be a dividing line between developing a closer partnership approach and retaining the independence to hire and fire. But it helps both sides to understand where family offices want to draw that line.
 

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